Portland City Club

Friday, January 21, 2011 Governor Hotel Ed Ray

The OUS legislative proposal is most importantly about sound business practices to provide public university education services in exchange for state tax dollars and student tuition expenditures. The proposal includes performance measures to document educational outcomes to meet the needs of Oregon. Changing the status of OUS from a state agency to a statewide university system would eliminate each problem described below and many others faced by the universities, problems that raise universities costs needlessly, increase their financial and operating uncertainty, and undercut their ability to provide current and future students with the education they need and deserve for their tuition dollars.

Again, the proposed change of status for OUS is not simply about governance but rather about effective management and accountability of public universities. For context, let me highlight how the current agency status of OUS creates operating problems for each of the universities. The proposed OUS framework would remedy these and other problems. As business leaders yourselves, I ask you to consider the benefits of change from the conditions described below.

Currently, tuition dollars collected by OSU from students and families can be removed from fund balances for use elsewhere by the state. For example tuition dollars that were paid to provide students with an education could be used for the state department of corrections. Providing students with the highest possible quality education requires continuous upgrades in information services, renovating and building facilities, hiring and retention of exceptional faculty, and expansion of student support services. These medium and long-term commitments cannot be planned for if the legislature can simply take the money for other uses. Imagine if you had to tell a customer that you could not use the check he gave you to provide the business service you promised him because you had to give his money to someone else. How would you make medium and long term business expansion and investment decisions if someone could take your cash reserves at any time to use for something else?

Now, the interest earnings on tuition balances go to the state Treasurer for other uses. So, students and families pay tuition but any earnings on those tuition dollars are not available to educate the students. Imagine in running your own business that sales revenue that accumulates in the bank earns interest and then the bank tells you that it spent your interest earnings on something else.

As part of a state agency, OSU is limited to spend a fixed amount of money each biennium by the legislature just like other state agencies. Because of successful student recruiting in the last two years, OSU raised much more revenue through tuition than expected. Therefore, our total revenue to educate current and new students exceeded the state determined expenditure limit. Now, we cannot spend existing revenue to educate this larger group of new and continuing students without approval by the state legislature. In December the legislature told us we cannot spend that money. In effect, the state budget process is not responsive to enrollment growth even when the needed funds come from students and their families and not the state. Imagine you experienced unexpected growth in sales in your own business and just as you were about to use the additional revenue to increase output, improve service, and build your business someone told you that you could not spend that money. You still have new customers but no money to provide the services they paid for with their own money.

At present, OSU cannot use cash reserves to make necessary infrastructure repairs. The university experienced a severe power outage in early December and some property damage. Yet, we cannot use funds on hand to upgrade and replace worn equipment and parts to maintain a safer physical environment and there are no state funds available to get the job done. Suppose you discovered some structural flaws in your facility or electrical equipment that should be replaced for the safety of your employees and you were told that you could not use cash reserves to do the job.

Every business has to maintain accounts that are more detailed and complex as the diversity of the product line and the complexity of the supply chain increase. State funding to K-12, community colleges and universities is tied directly to enrollment in each of those sectors and K-12 and community colleges are provided block grant funding from the state each biennium. For those same activities, OSU has 6,300 reporting lines. Imagine adding thousands of reporting requirements to your already complex accounting activities and consider the costs in time, staff, and other resources to satisfy those additional demands.

Each of these state agency practices would end if the OUS legislative proposal is adopted. We need your support to move toward best business practices in higher education in Oregon.

NEXT STEPS:

I hope that the examples just cited help you understand my laser like focus on the need to pass the OUS governance proposal during this legislative session. There are other important issues to be addressed going forward within a newly adopted statewide university system. One issue is whether or not individual universities should have local boards. I expect the Board of Higher Education to take up the issue of local boards, their selection, composition, range of responsibilities, and relationship to the OUS Board after this legislative session.

Another major issue is state funding for the universities. Currently, resident tuition and state funding per resident student are less than the full cost of educating resident students. If, as expected, the state cuts funding by 25% next biennium, the students will still be enrolled. Suppose you had a customer for your product who wanted to buy the same number of items next year as this year but he told you he would give you 25% less. Proposals to stabilize state funding for higher education are about preventing a buyer from unilaterally cutting the bill for the same product or service.

The problem of not being able to lock in state funding per resident undergraduate student arises from the fact that one legislature cannot bind future legislatures with respect to spending. President Lariviere has made one proposal to use bonding to make the state commitment permanent. President Wievel has proposed possible use of property taxes to stabilize funding for universities. A more conventional approach would be to have state funding per student constitutionally mandated. Each approach has merit but details need to be worked out for each and some approaches work well for some of the universities and not for others. Each requires voter approval of a constitutional initiative. Again, the issue of stable state funding should be taken up by the Board after a new statewide university system is approved.

Furthermore, strong research universities like Oregon State University are critical to the long-term economic growth and social progress of communities, to attracting and retaining industry, and to entrepreneurship, innovation, and new business development ventures. State funding to OSU is leveraged 6:1 through external grants and contracts, targeted federal funds, industry partnerships, local county support, and private fundraising. Innovation through university R&D directly contributes to the quality of student educational experiences, and prepares students to be competitive in a global economy. This critical aspect of OSU’s mission is an investment in innovation, business creation and growth, expanding job opportunities for Oregonians, and sustaining communities. The state needs to be a significant partner in this investment effort, and right now, it is not.